One definition of bad debt is any debt that goes toward a depreciating item that does not add value to your life. A good example of bad debt is financing a 72-inch television. A car, although a depreciating item, adds to your life by allowing you to get to work. In that light, a car loan would be considered good debt.
Negative Equity Equals Bad Debt
Having said that, a car loan can be a bad debt if not used wisely. In order to remain good debt, a car loan must not be worth more than the value of the car, a scenario known as negative equity. One way to ensure that does not happen is to make sure that you have at least twenty percent of the total purchase price of a vehicle as a down payment. Additionally, you need to research the typical resale value of the car you are interested in. Some models retain their value better than others, resulting in higher resale values and a lower risk of negative equity.
A third way to keep yourself from going upside-down on a car loan is to buy a used vehicle. Most vehicles lose a minimum of 35 percent of their value within three years of being manufactured. If you feel that you must have a new car, you can find great vehicles that are moderately priced and hold their value quite nicely. Toyota, Hyundai, and Kia have the widest selections of vehicles that fit into this category.